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Agensi Kaunseling dan Pengurusan Kredit Aras 8, Maju Junction Mall 1001, Jalan Sultan Ismail 50250 Kuala Lumpur Fax : 03-2616 7601 E-mail: enquiry@akpk.org.my AKPK First Edition 2011 The copyright of this book belongs to Agensi Kaunseling dan Pengurusan Kredit (AKPK). This book or parts thereof, may be reproduced, translated, or transmitted in any form with prior written permission from AKPK only for the sole purpose of education. No monetary gain in any form should be made or derived, whether direct or indirect from such reproduction.

ISBN 978-983-44004-2-2

Disclaimer: The information contained in this book is solely for educational purpose. It is not intended as a substitute for any advice you may receive from a professional financial advisor. Agensi Kaunseling dan Pengurusan Kredit (AKPK) disclaims all and any liability to any person using the information in this book as a basis for making or taking an action. While all efforts have been made to make the information contained in this book accurate, AKPK seeks your understanding for any errors or omission. The names and details of individuals in the real life cases have been changed to protect their identities.

Chapter

Cash FLOW ManagEMEnt

Managing your cash is important to ensure that you have complete control over your finances. As cash is an exchange tool which allows you to buy goods and services, it is important for you to first understand your money managing habits. Do you normally run out of cash before your next paycheck arrives? Or are you the type who has more than enough balance in your bank account? Regardless of your answer, this first step of a realistic assessment will help you analyze how much cash you ear n against what you spend. This simple concept is called cash flow management. Analyzing your cash flow can tell you a lot about the nature of your income, spending habits and lifestyle requirements. To further understand what cash flow means, let us get started by learning about cash flow management.

What is Cash FLOW ManagEMEnt?

Cash flow management is the process of monitoring, analyzing and adjusting your personal cash flow. Your personal cash flow is made up of two main components; your income (inflows) and your expenses (outflows). Your income or cash inflows may consist of active income and passive income. Active income Is derived from your employment or business ventures. The moment you stop working or doing business, your active income also stops. Some examples of active incomes include salary from employment and profits from businesses Is cash derived from your savings or investments. Passive incomes are received regardless of your employment status. Some examples of passive incomes include income from interest or profit, rentals, dividends and royalties

Passive income

Cash outflows, on the other hand, include fixed expenses, variable expenses and discretionary expenses. Fixed expenses Are expenditures of a fixed nature. These expenses are generally necessities and the amounts incurred are normally the same every month. Examples include housing loan and hire purchase installments, rental payments, insurance premiums and childcare expenses Are expenditures that vary from month to month. Like fixed expenses, most variable expenses would also be considered necessities. Some examples include food, clothing, utilities, mobile phone bills and essential household items Are optional expenses. Most discretionary expenses are items which are considered non-necessities or nice-to-haves. Several examples include dining out, branded clothing, air-conditioning, cable TV, entertainment and non-essential household items

Variable expenses

Discretionary expenses

Now that you have an understanding of cash inflows and outflows, let us study its application through a cash flow statement.

What is a cash flow statement?

A cash flow statement shows all your income (cash inflows) and expenses (cash outflows) for a given period of time. It is a basic tool to check your financial health and assess your financial position. Proper management of your cash flow ensures that you always have sufficient income to pay for all your expenses and puts you in a good cash position.

What is your cash position?

If you receive more than what you have spent after deducting your expenses, you have a surplus (positive) cash position. However, if you spend more than what you get, then you are said to be in a deficit (negative) cash position. Total Cash Inflows > Total Cash Outflows = CAsh surPlus KeeP uP The gOOD wOrK! Total Cash Outflows > Total Cash Inflows = CAsh DeFICIT YOu mAY wAnT TO reVIew YOur sPenDIng When your cash position is in a deficit, you will most likely use borrowed money to subsidize the cash shortage you are experiencing. Spending exactly what you earn does not count as a good cash position either. When you spend exactly what you have, it means that you do not have any savings in case of emergencies. Imagine, what would happen to your cash position if you lose your job or earning capability?

To be in a good financial position it is advisable to have cash surplus at all times. A cash surplus not only allows you to keep money aside for unexpected expenses but also gives you an opportunity to build your investment. This will bring you closer towards achieving your financial goals. So how can you manage cash flow to achieve cash surplus? One of the most effective ways is through the use of a budget.

What is a BUDgEt?
A budget is a plan for managing your cash flow and is used to estimate your future income and expenses. To put it simply, a budget lists all your expected cash inflows and outflows to assist you to make prudent financial decisions.

Why do i need a budget?

How many times have you made ATM withdrawals only to realize that you have spent all your money within a couple of days? Often it becomes extremely difficult to remember where that money was spent. Many people do not keep track of their finances and end up spending more than they mean to. This is why a budget is important.

Benefits of having a budget

Live within your means Cultivate a saving habit Save for financial emergencies Enhance your net worth

Live within your means

needs and wants Remember that your budget is based on your income and expenses. As each persons income and expenses differ, your budget should be based on your needs and wants. How do you then differentiate between a need and a want? A need is something you must have, that you cannot do without. While a want is something you would like to have, which is not absolutely necessary. Some examples of needs and wants are as follows: nEEDs Food Shelter / Home Clothing Quality time with family Car / Motorcycle Mobile phone Computer Wants Fine dining Resort-like bungalow Branded clothes Overseas vacations Luxury / Sports car Advanced full-featured phone Advanced full-featured computer

As time evolves, your basic needs may extend to more than just food, shelter and clothing. Your want today, may become a need tomorrow.
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Take this example. An individual 20 years ago did not view mobile phones as a need. Conversely, in todays modern world, a mobile phone is considered a necessity which makes it a need instead of a want. However, when you choose a mobile phone that is expensive and has all the latest features, you are shifting this need into a want. The decision you make with regard to what you need or want will directly affect your spending. Delayed gratification Delayed gratification means delaying your wants to a later period instead of having it now. Whenever you intend to make a purchase, especially when it is a want item, take time to think whether it is within your budget. Living within your means requires you to learn how to say no to unnecessary spending. Look into substitutes for your needs and wants especially if it does not fit your budget. Ask yourself these questions before you spend: I n s t e a d o f b u y i n g a c a r, w h y n o t u s e p u b l i c transportation? If you really need a car, can you consider getting a second-hand one? If you need a mobile phone or a computer, will a basic model serve your purpose? If you want branded clothing, can you substitute for reasonably priced and good quality clothing instead?

A budget needs to be realistic and tailored to meet your earning capacity and spending needs. Living on a budget does not mean sacrificing all your luxuries. It simply means that you will have to plan and at times change your perceptions and spending habits. spending wisely A key to a successful budget is to spend less than what you ear n. When you have the urge to buy something, pause and ask yourself the following questions: Can I afford to buy it? Do I really need it? Is there something cheaper? Can I delay buying it?

tiPs

On sPEnDing WisELy
TIme Plan your purchases to avoid making multiple trips to the stores Optimize the use of your resources, including fuel and time Avoid getting caught in last minute shopping frenzy Stock up household items in advance to avoid festive rush lIsT Always have a shopping list to avoid unnecessary buying Avoid buying things you do not need Always keep to your budget COmPAre Compare prices at various outlets before buying Keep a price book to track prices on frequent purchases

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Passion for the high life

Age : 33 years old Occupation : Medical Doctor Marital status : Single Dr Azam is young and successful. At only 33 years old he seemed to have it all; two flashy cars, a beautiful condominium and a flourishing career. Dr Azam felt he deserved all the good things in life. He worked hard and studied even harder to become a doctor. He was convinced that he could afford everything money could buy. He relied heavily on his credit cards and lived an extravagant lifestyle. His passion for the high life was immeasurable. He loved the attention he got from everyone when he stepped out in expensive leather shoes paired with a designer tailored suit. Dr Azam knew that with a 5-figure salary monthly as a specialist medical doctor, he was well on his way to financial freedom. His poor cash flow management and lack of savings did not worry him. All he wanted was instant gratification from the toys he bought with his five credit cards. Dr Azam did not have a budget to track his income and expenses. Due to this, he was soon unable to keep up on the installments on his two cars and could barely make the minimum payment on his credit cards. To make matters worst he was 3 months behind on the rental of his exclusive condominium. Facing eviction, Dr Azam was surrounded by creditors demanding payment for all his outstanding debts. Due to defaults, one of his cars was even repossessed. In no time Dr Azam was caught in a tangled maze of debt, owing creditors RM120,000 on credit cards alone. With bankruptcy looming ahead, Dr Azam decided to seek AKPKs help.
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CULtiVatE a saVing haBit

A budget helps you develop a saving habit. Without a savings plan, it will be harder to achieve your financial goals such as buying a house or car, obtaining further education or even building a retirement fund. It is suggested that you save at least 10% of your income every month. It is even better if you can save between 15% to 20% because this will translate into more money for your future.

guide

on cultivating a saving habit

1 2 3
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Always pay yourself first

Save at least 10% of your income Make your savings automatic through a salary deduction scheme or other similar arrangement Set meaningful and significant goals to motivate yourself to save. You can set short, medium and long term goals After having saved the first 10% of your income, gradually challenge yourself to save a little more

motivate yourself with a financial goal

make savings a challenge

Put away surprises

Every time you get an extraordinary income such as a bonus or cash gift put part of it into your savings account immediately If you get a salary raise, keep to your current standard of living and put the additional money in your savings

save for financial emergencies emergency buffer

In life there are many financial emergencies which may limit or take away your earning capacity. Some even require you to come up with substantial amount of money urgently. The most common need for an emergency fund includes sudden loss of income through unemployment and unexpected medical, home and car repair expenses. If you lose your job you will still have to continue paying your bills! To cope with these uncertain situations, it is important to have an emergency fund that will help you deal with such events. As a general guideline, you should have an equivalent of at least 3 to 6 months worth of your basic living expenses. The last thing that you want is to be forced to rely on a loan which could simply compound the problem. Apart from saving for financial emergencies, a budget can also help you save for other big ticket items or special events while enhancing your net worth.

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EnhanCE yOUR nEt WORth

A net worth statement is your financial scorecard which can be used regularly to assess your financial standing. It serves as a reference point in making money-related decisions and reports on what you own (assets) and what you owe (liabilities). Assets include items such as cash, savings, real estate, unit trusts and shares while liabilities include all types of loans including borrowings from family and friends, credit cards debt, payments for rental and utility bills. Your net worth can be enhanced by monitoring your expenses through the use of a budget. A budget helps you control your expenditure. This in turn enhances your net worth by assisting you to invest and accumulate assets. Therefore, the key to enhancing your net worth is simply to spend less and save more for your investment.

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guide to calculate your net worth

Step 1 List the things of value that you own

Cash and its equivalent, such as savings accounts and fixed deposits

Investments, such as stocks, bonds and unit trust funds

Retirement funds, such as EPF and personal retirement accounts

Properties like houses, apartments and land

Personal belongings that can be sold such as jewelry, gold, art and antiques

Step 2 total up your assets

Step 3 List the things that you owe to others

Loans, including your student loan, bank loans and other loans

Credit card balances

Taxes owing, such as real estate and income tax

Money owing to relatives, friends and others

Balance of installment payments for consumer goods such as furniture and TV

Step 4 total up your liabilities

Step 5 assets minus liabilities

If the number is positive, pat yourself on the back. You should plan on how to increase your net worth. If it is negative, do not despair, because you can take actions to improve your financial position 15

how do i set a budget?

after knowing the benefits of having a budget, you are now ready to create your own. all it takes are three simple steps: 1. List down all your sources of income Your salary should be net of EPF, tax and SOCSO deductions

2. List down your expenses Your expenses should include fixed expenses, variable expenses and discretionary expenses Here you need to pay yourself first as savings (minimum 10% of your total income)

3. Determine your net cash flow position If it is a surplus, well done! Try to keep to that budget of yours in your actual spending If it is a deficit, revise your budget by cutting back on discretionary expenses until you get a positive net cash flow position Ideally you want a surplus to be able to build up your emergency fund

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As you can see, it is not difficult to create a budget. However, successfully maintaining and sticking to one requires a little more time and effort. You also need to be realistic and flexible in your approach. If you have a moderate income, do not expect to save a lot of money in a short period of time. Also there may be times when you need to revise your budget to cater for unexpected expenses. When you are in a good financial position with cash flow surplus, then you are ready to invest. There are many types of investments, including real estate, stocks and bonds in the market. Returns on these investments vary in tandem with the risks associated. If you plan on being an investor, be mindful of your risk appetite levels before investing. Invest only on products that are familiar to you Do your homework and make sure you understand the risks involved Do not put all your eggs in one basket. Remember, spreading your money across a variety of investments is the key to spreading your risks

FinanCiaL sCaMs
When investing your hard earned money, be extra careful of getrich-quick schemes. Such schemes promise high returns with little or no risk. These get-rich-quick schemes are frequently promoted through various channels, with internet and short message service (SMS) being the more common platforms. The next time you come across these get-rich-quick schemes, be vigilant and remember that if it sounds too good to be true, it probably is!
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tell-tale signs of financial scams:

Promise of high returns of between 5% to 20% a month with little or no risk The offer is for a limited period only and you are asked to sign up immediately The scheme is in another country and you cannot check on its office or confirm its status You are asked to give confidential information such as your bank account number You are asked to deposit a small sum of money to meet the processing and administrative fees

The golden rule is not to be greedy. Always check with friends, family and professionals on whether such investment opportunities are genuine or otherwise, even if it is recommended by someone close to you. Find out more about the offer. Be suspicious particularly of investment that offers high returns, low risk and is free of investment costs, as it is unlikely that a business venture can provide all these. Browse websites of BNM (www.bnm.gov.my) and SC (www.sc.com.my) for further information

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takeaways
A cash flow statement shows you where your money is coming from and where it is going over a period of time A budget is simply a tool to help you manage and track your cash flow more effectively A budget is the best tool to ensure you spend and live within your means Having savings is very important as it will help with emergencies A net worth statement gives you a snapshot of your financial position at any given time and serves as a tool to help you track your progress

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Checklist
Draw up your monthly cash flow statement showing all inflows and outflows Come up with your budget by setting aside at least 10% of your income as savings Draw up your net worth statement to see how much you are worth now

Appendix 1.1 : sample of budget and cash flow statement Appendix 1.2 : Blank template of budget and cash flow statement Appendix 1.3 : sample of net worth statement Appendix 1.4 : Blank template of net worth statement

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sELF assEssMEnt
1. Which of the following are the main components of cash flow management? a. Income and expenses b. Assets and liabilities c. Debtors and creditors d. Profit and loss account and balance sheet 2. A budget helps you to _________ a. live within your means b. achieve financial goals c. set aside money for savings d. all of the above 3. Why is savings important? a. To plan for your retirement b. To prepare for emergencies c. Down payment to buy your first house / car d. All of the above 4. How many months of living expenses are recommended for your emergency fund? a. 1 - 2 months b. 3 - 6 months c. 8 - 9 months d. 12 - 24 months
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5.

What is your net worth? a. My total liabilities plus total assets b. My total income plus total expenses c. My total asset minus total liabilities d. My total income minus total expenses

6.

What is the minimum monthly recommended percentage of your income to be set aside as savings (apart from EPF contribution)? a. As and when you have it b. At least 50% each month c. At least 10% each month d. None of the above

7.

What is a good financial habit? a. Having monthly repayments of more than 40% of your gross monthly income b. Tracking your expenses and cash flow c. Living lavishly d. Paying the minimum amount on your credit cards

Check your answers at the end of this book

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